Europe Rules Out Stimulus

Finance ministers reject Geithner’s plea to increase size of rescue fund.

European finance ministers ruled out efforts to spur the faltering economy and showed no signs of taking up a proposal by U.S. Treasury Secretary Timothy Geithner to increase the firepower of the debt crisis rescue fund.

Inviting Geithner to a euro meeting for the first time, the European finance chiefs said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

“We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters today after chairing the meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”

Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros ($353 billion) in aid for Greece, Ireland and Portugal has failed to extinguish.

Geithner made little headway with a call for Europe to boost the capacity of the 440 billion-euro rescue fund, known as the European Financial Stability Facility, by enabling it to tap the European Central Bank.

Juncker said there was no discussion of expanding the fund today -- at least not while the American guest was in the room.

“We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area,” he said. German Finance Minister Wolfgang Schaeuble spoke of a “very intensive but friendly discussion” and Austrian Finance Minister Maria Fekter found it “peculiar” to be lectured by the U.S., a country with higher aggregate debt than the euro area.

Instead, the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the primary and secondary market, offer precautionary credit lines and create a bank- recapitalization facility. The target for completing national approvals of the new powers slipped to mid-October.

Geithner preached the lessons of the emergency banking support provided by the Treasury and Federal Reserve in reaction to the collapse of Lehman Brothers Holdings Inc., mixing it with criticism of Europe’s crisis management coordination.

‘Permanent Message’
Europe projects an image of “ongoing conflict” between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said at a banking conference in between euro meetings.

“Your financial challenges in Europe are eminently in your capacity to manage financially, you just have to choose to do it,” he said.

Echoes of that appeal came from ECB President Jean-Claude Trichet, six weeks from the end of an eight-year term as the overseer of euro interest rates.

“Our permanent message is of course to be ahead of the curve,” Trichet told reporters. “All that I heard goes in this direction. But the problems are not words, the problems are deeds.”

The ECB was in the forefront again yesterday, joining other major central banks in offering dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years.

Finance chiefs stuck by the view that commercial banks have enough capital to ride out the turbulence that has driven the bonds of Greece, the epicenter of the crisis, to less than half their nominal value.

‘Substantial Improvement’
Trichet hailed an accord between governments and the European Parliament that will tighten the euro area’s economic management and make it easier to impose sanctions on countries that overstep the budget-deficit limit of 3 percent of gross domestic product.

The new rules, to take effect by Jan. 1, mark a “substantial improvement,” Trichet said.

The debt overhang is taking its toll on the wider economy, the European Commission said yesterday. It cut its growth forecast to 0.2 percent for the third quarter and 0.1 percent in the fourth, down from projections of 0.4 percent for both periods.

“Recovery is stalling in the second half of the year, but we do not forecast a return to recession,” European Union Economic and Monetary Commissioner Olli Rehn said. “Uncertainty and stress in financial markets is now having negative ramifications in the real economy and is hampering our growth prospects.”

Greek Aid
Greece is now looking to the ministers’ next meeting, on Oct. 3, for a decision on the release of an 8 billion-euro loan installment. The loan would be disbursed by mid-October, enabling the government to pay its bills through the end of the year.

The fate of future Greek loans remains tied up by a demand by Finland, one of Europe’s six AAA-rated countries, that it receive collateral, potentially in the form of real estate or shares in nationalized Greek banks.

While a final agreement eluded them, the ministers agreed on the principle that collateral must carry a cost, with the goal of limiting its use to Finland.

“There is unity that collateral, first of all, must be open to all and, second, must cost something,” Austria’s Fekter said.

On personnel matters, the officials set a Sept. 27 deadline for nominations to replace Germany’s Juergen Stark on the ECB’s Executive Board. Stark, an opponent of the bank’s bond-purchase program, said last week he will quit before his term ends in May 2014.

The only candidate so far is German Deputy Finance Minister Joerg Asmussen.

Bloomberg News

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